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Remember the UBS London trader who in early September 2011 hit the news as UBS announced it had lost over $2 billion dollars as a result of unauthorized trading activity?

Well Kweku Adoboli goes on trial this week in London in the case over $2.3 billion in trading losses and if convicted faces a possible 10 year prison sentence.

UBS refer to this even as an ‘unauthorised trading incident’ which is almost comically soft considering the sums involved.

As Michael wrote in his book The Inner Voice of Trading and many others have said, the key to trading well is learning to take consistently small losses. However you look at this UBS situation, there has to have been huge ego trading taking place, and negligence in the risk management department.

Independent traders get carried out in body bags from this business if they leverage up and go all in not adhering to the first cardinal rule of keeping losses small. It seems with OPM (other peoples money) it’s all too often part of the expected culture.

For details on the trial from Reuters take a look at UBS trial against Kweku Adoboli.

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Israeli Shekel

“Tracking is identifying an animal by the footprints the animal left on the ground, by it’s scat, and by the environment surrounding those footprints. By identifying the animal in question, a person can know whether to pursue the animal or evade it. ” – Native American Indian

Needless to say tracking is essentially what we do as traders, attempting to identify the footprints of various participants, analyze them, and decide whether to pursue or evade a particular security. Sometimes however, footprints are hard to detect, for example a 10 million dollar purchase in the T-bond market by an extremely knowledgable participant will likely go unnoticed as the T bond market is simply too deep.

But what if this same knowledgable participant would also trade a smaller, less liquid related markets?

This brings us to the Israel / Iran constant war rumor fest.

If we assume that such potential conflict will not be pre-announced as the U.S. Iraq war was for example, (it is simply not Israel “style,” ) and if we assume that such conflict will have an immediate impact on crude and equity markets, we as traders should be on a mission to look out for footprints.

But since crude and equities markets are extremely deep, looking at a smaller related market might provide an early mover advantage.

One such market is potentially the Israeli Shekel (ILS) which curiously enough is at a technical inflection point, following a decent decline (inverse chart) versus the USD, a breakout of the pennant formation below might provide a decent trading opportunity regardless of the reasons (the currency could be weak for unrelated economic reasons for all I know…)

Acceleration in the decline or in the currency’s volatility, might provide a great indication that “something” is going on, enough to get our antennas up, potentially tighten our stops in crude and other related markets, buy volatility etc…

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As a lover of music I am never quite sure of what I think of muzak.

In case you were wondering I haven’t made a spelling mistake with muzak. The Cambridge dictionary defines it as “recorded music that is played quietly and continuously in public places, such as airports, hotels and shops, to make people feel relaxed”. You probably know it as elevator music or that subtle keyboard version of Let it be! that you catch yourself sometimes humming to whilst in your local store.

Adrian North, a Professor of Psychology, has found out that the supermarkets may have very good business reasoning for this “background music.”

“If you play slow music in supermarkets then people tend to browse more slowly and look at more products. As a result they spend an average of 10-20% more. I shudder to think what 10-20% on the bottom line for Tesco is.”

It seems from this niche area of research that personality types can be linked quite accurately to certain musical styles. As a result businesses can utilize music as a way of enticing particular stratum of society to be more comfortable spending time in their stores and thus increase sales.

What does the music you listen to say about you?

Do you trade with music on in the background? Could this be effecting your results? Do you trade more frequently because you are amped? Bet you’re a day trader…

Did you realize you were being manipulated even by the sounds you hear in your local supermarket?

For another example of manipulation in the blogoshpere you might like to check out Michael’s recent post You Are Being Used

About the Prof who’s down with Muzak.

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It’s fairly common in the commodity trading world to initially only think in terms of technical things like moving averages, bollinger bands and all sorts of exotic combinations of these in the quest to generate trading signals. So much so that it’s possible to not even consider the many uses of the market, of which speculators only form a part.

Michael wrote a piece of Barron’s back in June 2011 on the huge demand China has for pigs and how this affects in turn corn prices. Hungry Hogs Lift Wheat Prices.

Smithfield Foods, Inc. produces and markets a variety of fresh meat and packaged meats products both domestically and internationally. They pretty much know everything pork and hog related. In the USA you may have heard of their pork business Smithfield Packing Company, Inc. (Smithfield Packing), Farmland Foods, Inc. (Farmland Foods) and John Morrell Food Group (John Morrell). They also have hog production operations in the USA as well as food processing, distribution and meat processing operations throughout Europe and Mexico.

Clearly they know their pigs, but did you know, that hog feed is an 80/20 blend of corn and soybean meal, and it takes four pounds of the stuff to produce a pound of pork?

As you can perhaps gather from this; a company so heavily focused on the hogs has to be focused on the grain markets as well. Looking at both corn and soybeans at all time highs and the current drought in the US negatively affecting the supply of these grains their costs of doing business are clearly rising.

This is where Smithfield Foods Inc. provide an example of where hedging fits in commodity market, as well as company strategy.

You see, Smithfield missed their forecasts with their quarterly earnings and have reported that their domestic hog production will be “negatively impacted” by the jump in feed prices. But they have been employing a hedging strategy and they believe their “favourable grain hedges” will limit the damage of the high grain prices the market is experiencing.

Larry Pope the Chief Executive said “our successful risk management strategy should meaningfully protect margins and produce results that are significantly better than the industry as a whole”.

With such serious increases in the feed costs that their business is so dependent on it would not be unforeseeable for them to have had some crushing losses. However, as a result of intelligent hedging in the commodity futures markets over the whole year, at worst they expect a “marginal” loss and even perhaps a small profit.

Commodity speculators who all too often get a bad rap are often on the other side of these trades allowing the transference of risk for such companies as Smithfield Foods Inc. Smithfield look to transfer the price risk that high grain prices will have on the business by locking in prices in the futures market at a level acceptable to their business and the speculator looks to make a profit for accepting that risk.

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There is a telling move in cocoa and there are some strong suggestions as to why when looking at the fundamentals.

In the world of cocoa the worlds foremost producers are the Ivory Coast and Ghana, with the former taking the first place and Ghana second. Politically this is not a region without troubles and the usual take has been that Ghana is the more stable of the two.

In 2011 troubled elections in the Ivory Coast sent bean prices rising in a not unusual market reaction.

This year in Ghana, the traditionally more stable one of the two, we saw the death of the president John Atta Mills who went by the name Asomdwehene or ‘King of Peace’. This increases uncertainty in the region over stability. Ghana were quick to put the Vice President in a care taking role which seemed to keep a lid on a potentially volatile reaction. However, the real test comes in December this year where elections will take place.

Recent actions by the Ivory Coast could well see prices spiraling out of control.

They have set up the Cocoa and Coffee Council in order to try and protect farmers from price volatility. To do this they sell most of the national crop well in advance of harvest and they are guaranteeing to pay farmers 60% of the advance prices.

This all could go very wrong if futures prices continue to rise. This will mean that farmers will get considerably less from the government than they would get in the spot market. If the payout price falls too short of the futures price farmers could chose to default on pre-agreed sales, sell at market prices or even resort to smuggling in order to sell in next door in Ghana. This mess would see those cocoa dependent businesses racing to gather supplies and an obvious spiral upwards of the price.

In addition to these issues Macquarie estimates suggest production is set to be down for a second season in 2012 – 2013 with a shortfall of more than 100,000 tonnes as a result of drier than usual weather.

These factors add support from the fundamental side to the move that looks to be underway in cocoa.

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